Answer to Question #310690 in Microeconomics for Ahmed

Question

Discuss each of the following statements from the standpoints of equity and efficiency.

“Everyone in society should be guaranteed the best health care possible.”

“When workers are laid off, they should be able to collect unemployment benefits until they find a new job.”

Answer 1

a) If everyone were guaranteed the best health care possible, much more of our nation's output would be devoted to medical care than is now the case. 

If currently doctors form a monopoly and restrict health care to keep their incomes high, you might think efficiency would increase by providing more health care. But more likely, if the government mandated increased spending on health care, the economy would be less efficient because it would give people more health care than they would choose to pay for. From the point of view of equity, if poor people are less likely to have adequate health care, providing more health care would represent an improvement. Each person would have a more even slice of the economic pie, though the pie would consist of more health care and less of other goods.

b) When workers are laid off, equity considerations argue for the unemployment benefits system to provide them with some income until they can find new jobs. 

After all, no one plans to be laid off, so unemployment benefits are a form of insurance. But there’s an efficiency problem¾why work if you can get income for doing nothing? The economy isn’t operating efficiently if people remain unemployed for a long time, and unemployment benefits encourage unemployment. Thus, there’s a trade-off between equity and efficiency. The more generous are unemployment benefits, the less income is.